A favorite saying from my floor trading days was, ‘When the revolution comes, first they shoot the speculators.’ I usually envisioned the speculators being rounded up by the revolutionaries in this scenario. But with a war on speculators being declared by government types, I suspect I had the details all wrong. Germany’s intent to curb ‘speculation’ through curbs on some types of short-selling shows us that once again people will do whatever they can do prevent markets from going where they want to go. And as we know, the markets will get to where they’re going anyways.
No person, no fund, no government is larger than the markets. The urge to over regulate markets is damaging in two ways. It postpones markets’ natural ability to seek their proper level, thereby delaying the benefits of matching the greatest number of buyers and sellers at auction. But also in defeating market participants’ faith that the market will be there for them when they need to buy or sell. And as particpants lose faith, they exit the market and take liquidity with them. Everyone is a loser when markets become overregulated.
We seem to have reached a point in the system where governments and bankers find their backs against the same wall. Governments have enabled the bankers to become very rich in the current credit bubble and bankers have enabled governments to accumulate huge amounts of power via cheap credit and deficit spending that enabled vote buying. These two entities are doing all they can to maintain the status quo, but their inevitable failure is perhaps the only certainty in these uncertain times.